By Xaver Davey
I. Abstract
To democratize and continue optimal long-term growth that is positively experienced by as many people as possible, the United States of America ought to implement efficient corporate taxation policy. To ensure bipartisanship, this corporate tax structure should reflect a blend of Modern American Conservative and Modern American Liberal economic policy. While potentially perceivable as counterintuitive, each political ideology are each appropriate responses to different sets of circumstances, meaning a hybrid economy may be the best way forward. Ultimately, this memo advocates for corporate tax rates to be a function of market share, so as to incentivize innovation and simultaneously increase government revenue in the cases of monopolistic and oligopolistic markets, where government intervention is more likely to be needed.
II. Criteria
In recent times, political strife between fellow Americans has been tense; it is easy to feel that views are becoming increasingly extreme at the end of every political philosophy. Unfortunately, as it turns out, not only has the United States experienced continuous growing political polarization over the past four decades, but out of a dozen other OECD countries studied, the United States comes out on top as having the highest rates of increase in political polarization (Boxell).
Although various political issues exist today, one of the most significant topics is the economy, which frequently ranks at the top of American priorities. We frequently describe the two schools of thought: Modern American Liberalism—MAL—and Modern American Conservatism—MAC—which are primarily oppositional in worldview and structure. While, more often than not, these political ideologies are abbreviated to just “liberalism” and “conservatism,” they are technically distinct from classical liberalism and classical conservatism, which this memo does not cover in its scope. Unfortunately, subscribers of a particular side cringe at the sound of the counterpart’s economic perspective, leading to a disdain between differently opinionated people. One occurrence from that that is particularly concerning is the fact that many politically non-moderate individuals subject themselves to ideological echo chambers. For example, individuals who are leaning towards MAL or MAC frequently limit themselves to blog content confirming their beliefs (Lawrence).
Parallelly, various metrics indicating the health of the United States’ economy—one of the essentials being infrastructure—are crumbling (Friedman). While it would be nice to believe the United States, with all its might, is immortal, the reality is that economic and political configurations are a massive determinant of the success of a nation, even when culture and natural resources are controlled (Friedman).
While MAL and MAC thought are each incredibly diverse, for the purpose of argument, this paper will provide a couple of definitions, emphasizing the economic nature of each as it pertains to the scope of this memo. MAC is a system where the means of production are privately and corporately owned, where markets are largely unregulated. On the other hand, MAL can be defined as a system where the means of production is still mostly privately owned, but with notable public ownership in certain realms, where all markets are relatively more carefully regulated by a centralized government. Moreover, MAC systems tend to have lower taxes, fewer regulations, and fewer necessitated protections of laborers, whereas MAL would have the opposite traits—higher taxes, higher regulations, and a greater degree of required protection of workers.
Moreover, the United States of America would better compromise to combat vicious political polarization and deteriorating economic circumstances stemming from political stalemates. However, this action would not be beneficial just because the highest number of people will be satisfied, but because this amalgamation and ‘third way’ could take the best of each economic system and leave the rest behind in the realm of corporate taxes. After all, proponents of either economic philosophy may be surprised to know the benefits of partly incorporating policies from the other in their nation.
When addressing a solution to bridge the gaps between MAL and MAC, it is essential to address fundamental values that drive each group to hold their positions.
In the case of MAC, one of the most significant sources of contempt for MAL is the lack of emphasis on meritocracy. Americans who are modernly conservative typically believe that those who work harder should have more than those who do not. They believe that by instituting a MAL government that seeks to eliminate income inequality caused by classism and other discrimination, the government would effectively remove the kind of ‘justified inequality’ that stems from differences in work ethic and effort, disincentivizing productivity in the first place.
On the other hand, modern American liberals are often motivated to stamp out inequalities between different social groups that stem from arbitrary factors and exploitation. In the perspective of MAL, individuals pass down wealth from one generation to the next, creating generational wealth and giving those with an arbitrary inheritance the ability to amplify their wealth all while, because of the power of their position, having the ability to unfairly compensate the working class. They argue if a few companies run America, these shareholders can easily collude with each other to raise prices and lower wages, forcing the working class into a desperate situation that they cannot escape.
However, despite both theories claiming to hold onto values of justness and the common good, both worldviews make a perceivable assumption that contradicts each other. These assumptions are related to the systemic nature of an economy. MAC assumes meritocracy is built inherently into the economy, while MAL does not. Although not necessarily explicitly stated by many proponents of each theory, the meritocratic nature is dependent on the competitiveness of markets. The influence of how to market competitiveness impacts the opportunities and outcomes of anyone involved in the economy—essentially everyone—is contingent upon the nature of competition.
More specifically, the MAC mindset asserts that unregulated markets are best for the working class because these markets are competitive. In other words, modern American conservatives argue that wages and prices firms and individuals have are fair because they reflect values determined by actual supply and demand and, by definition, are not contaminated by individual exploitation. While this may sound outlandish and fantastical to a modern American liberal, this is technically true, but only under the assumption of competition. In perfectly competitive environments, it is well established among economists that firms have little to no incentive to increase prices or decrease wages because doing so actually harms the business’s financial health. Conversely, monopolies are known to have the ability to raise prices (Schwartzman). Moreover, increasing prices or decreasing wages intolerably would lead consumers or employees to walk across the street and resume business with competitors.
Modern American conservatives might bring up the example of restaurants. While more expensive restaurants certainly exist, affordable meals can be found in almost every big city. Proponents of this ideology explain that this is because of competition. With so many different restaurants competing for customers (countless chains and small businesses alike), prices are forced to stay low since these restaurants know a price increase could lead to customers simply going to the restaurant next door.
A modern American liberal may state that such a thought process is naive, as often there is not another suitable competitor. Furthermore, the modern American liberal may argue that the company any individual may be interacting with is massive, owned by a few stakeholders, and maybe in cahoots with other companies of similar status. Consequently, this suggests that “taking one’s business elsewhere” is not feasible as the working class has no choice but to tolerate mistreatment from conglomerate-level firms or fundamentally change the system in a final act of desperation. This MAL perception implicitly assumes a fundamentally uncompetitive market, one where only a few companies have most of the control.
In this case of an uncompetitive market, a modern American liberal might remind society of the smartphone industry in the United States. Apple, a single company, has almost consistently a majority of the market share, and when one includes their major competitor, Samsung, little market share is left for any other companies (StatCounter). Modern American Liberals rightly argue, justified by price fixing of oligopolies, that smartphones are so expensive simply because we consumers have little choice but to accept this form of exploitation. After all, It is not like there is really any other feasible alternative as competitors are constantly squashed by these firms’ anti-competitive behavior.
Interestingly, both MAC and MAL quite coherently describe reality and the economic problem space, but simply in varying circumstances. As it turns out, in terms of the assumption of competition in the United States, the reality is grayer. The economy is far from perfectly competitive, but also, many markets—like the restaurant industry—lack complete monopolistic or oligopolistic control.
III. Recommendation
Therefore, an ideal solution could be to have a dynamic hybrid economy that responds appropriately to changing market conditions by becoming more conservative or liberal, in a modern American context, in response to competitiveness per market. This would be assuming that each ideology is an appropriate response to its own set of assumptions of the American economy. In essence, a more competitive environment should have lower corporate taxes and vice versa. At the same time, while potentially outlandish sounding, potential policies required to do this are interestingly not all too different from specific structures already established in the United States. It ultimately rests on moving past a cookie-cutter approach to economic structures, as every market within the United States is unique. Therefore, economic policy should not be a blanket approach to all businesses in terms of taxes. Moreover, separate markets—examples including, but not limited to, groceries, smartphones, and clothing—and the business involved therein should experience financial policies depending on how competitive the market is. Finally, competitive markets should follow the logical outcomes of MAC assumptions just as uncompetitive markets should do so under MAL counterparts. In this way, meritocracy, the primary emphasis of MAC, is encouraged, while exploitation, MAL’s more dominant rhetorical priority, is discouraged.
Business taxes in the United States can be very complicated. Businesses may face numerous taxes; however, for simplicity of argument, corporate income taxes—defined as the taxes applied to a business on revenues minus costs (or net income)—will be the focus. Additionally, considering the incredibly complicated tax system the federation of the United States imposes, it would be helpful to simplify the tax code to ensure that tax policy is as effective as possible and minimize loopholes, all while not being overly burdensome.
Firstly, the corporate income tax is not progressive in most situations, unlike personal income taxes, meaning that governments apply a fixed rate to all businesses. One might argue that a progressive corporate tax might be more beneficial, an argument with a signature more reminiscent of MAL, however, this is not necessarily the case. Moreover, corporate income taxes on businesses should not be a fixed rate or even based on mathematically discrete brackets, like the personal income tax, since raw profits do not necessarily indicate the competitiveness of the business. For example, imagine two companies making $100,000,00 in profits annually, but one has a monopoly in its market, and the other has a sizable chunk but is far from asserting market dominance. One of them is much more capable of exploiting consumers via price-fixing—naturally, the monopoly—than the other, so having both businesses pay the same rate would not be effectively incentivizing growth but decentivizing domination.
Instead, the corporate income tax rate should be a mathematical function of a company’s market share. This function should be strictly increasing concerning the market share, but its exact relationship (identity, linear, exponential) would need to be determined. In other words, a company that has a large share of a market should be taxed more compared to a company that does not have a large share.
This way, relatively small businesses, and consumers can enjoy lax capitalist-economy taxes in competitive environments while simultaneously, the government disincentivizes businesses that can be too exploitative with higher taxes. Taxes earned this way can be used to offset the harm the uncompetive markets cause, like increasing wages on underpaid workers or creating grant programs for providing funding to potential competitors. How exactly this money would be diverted should be left to the discretion of local legislators on a context to context basis.
Another important thing to consider are the terms “market” and “market share”—the ultimate determinants of corporate taxes in this proposal.
In the case of defining a market, this memo recommends utilizing existing legislation passed on a federal level. Often, terms like “smartphones” and “groceries” are defined within existing legal structures. As a result, defining markets, for consistency, should be based on these already existing definitions. In the case of a deficiency in existing legal definitions to help in defining a market, economic analysis can be done, where substitute products can be observed through various metrics, helping legislators pass formalized definitions.
While defining market share can be difficult and there should be significant room given to legislatures in optimizing how this is defined, market-share could be determined by the percentage of revenue a group of products sold by a firm is to the total revenue of all products sold in that legislatively defined market. This percentage can then be used in a function to determine the corporate tax rate that is then applied to net income—revenue after costs.
One exception to this tax code proposal would be the case of new technology introductions, where trailblazers for a specific time may have a temporary monopoly in a market since they have created a completely new one from innovation—like the reasonably new smartwatch market. In this example, Apple has maintained a significant monopoly in the market since the technologies involved are so new and little competition has emerged. In this case, the government should slowly introduce an applied tax rate as the market stabilizes and takes shape. After all, if the government taxes businesses on a product market by product market basis based on the share they have of these respective markets, innovation incentives must be carefully analyzed. If a new market is created from new technology, innovation would be stunted if the pioneering company was immediately taxed at the maximum monopoly rate. Instead, in the case of new markets, taxes should slowly be introduced over the course of years.
An additional priority to note is the maximum tax rate applied—in this case, when a firm has 100% control over a defined market. These rates should not be too high to make sure companies do not flee to other countries for lower tax environments. While international collaboration between many countries in preventing such behavior may be practically useful, the reality remains that there may always be a handful of countries that advertise lower taxes for large companies, meaning that keeping the maximum corporate tax rate to a minimum may also be important. Then again, ensuring that this rate is not too low is also a priority. Further studies are recommended to optimize the function by taking market share into account to determine real corporate income tax rates.
IV. Conclusion
Considering the presented amalgamation seeks to capture the values of both MAL and MAC, the amalgamation will hopefully be favored by the majority of the United States population. Of course, die-hard advocates of any economic ideology may remain unconvinced, but hopefully, enough will be willing to support this bridging amalgamation.
The amalgamation also does not rely on outlandish assumptions and is, instead, rooted in fundamental and well-understood economic principles while being consciously aware of the incentive structures created from this economic policy.
Therefore, the most significant resistance is expected to be from large corporations that are monopolies or oligopolies in their respective markets. While not every company in a non-competitive environment is necessarily malicious, they will have their ability to exploit and control hindered. For this economic system to be implemented, Americans will have to be assertive in proving to their representatives that they want it.
If given a shot, this amalgamation of MAL and MAC economic theory will allow Americans to be innovative and keep wealth accessible while ensuring that no one is left behind because of arbitrary circumstances.
Works Cited
Boxell, Levi, Matthew Gentzkow, and Jesse M. Shapiro. Cross-country trends in affective polarization. No. w26669. National Bureau of Economic Research, 2020.
Friedman, Hershey H., and Sarah Hertz. “Why Nations Collapse: The Rise and Fall of the United States.” Friedman, HH and Hertz, S.(2021). Why nations collapse: The rise and fall of the United States. Journal of Intercultural Management and Ethics 3 (2021): 45-60.
Lawrence, Eric, John Sides, and Henry Farrell. “Self-segregation or deliberation? Blog readership, participation, and polarization in American politics.” Perspectives on Politics8, no. 1 (2010): 141-157.
Schwartzman, David. “The effect of monopoly on price.” Journal of Political Economy 67, no. 4 (1959): 352-362.
StatCounter, Global Stats. “Mobile operating system market share worldwide.” Erişim Adresi: https://gs. statcounter. com/os-market-share/mobile/worldwide (2019).